Market volatility? Let's not worry like it's 1987

A trader on the New York Stock Exchange on "Black Monday," Oct. 19, 1987. The Dow Jones Industrial Average fell 508 points, making a 22.6 percent drop in the index. An equivalent drop today is closer to a 2 percent loss. - MARIA BASTONE/AFP/Getty Images

2018 has been no stranger to huge losses in the Dow Jones Industrial Average. Yesterday was the eighth time the key index lost over 500 points in one day this year alone. This most recent drop reversed the markets gains for 2018. But the Dow broke the 26,000 point milestone earlier this year and flirted with 27,000 benchmark just last month.

It’s the mixed fortune for the Dow that Jason Zweig, a columnist at the Wall Street Journal, says should encourage individual market participants to keep their chins up. Just because 2018 has lost all gains to date, doesn’t mean you have. It’s a question of measurement: in points, the Dow is down for the year but for all the index’s ups and downs, investors may have received dividends. So it’s possible there’s no net lost from their equity investments as of January 1, 2018.

And a 500 point drop doesn’t mean what it used to. On Oct. 19, 1987, or as it was later known, Black Monday, when the Dow Jones Industrial Average lost 508 points — the biggest single day drop to date, the index lost 23 percent of its value. A drop of that amount today would be closer to a 2 percent loss.

To help put things in context, Marketplace Morning Report's David Brancaccio caught up with Zweig to see what he makes of yesterday’s plunge.

David Brancaccio: All right, sage market veteran what's worse, that coming into Thursday here, the S&P 500 and the Dow have lost all of their gains of the year or that the Nasdaq has entered what we call “correction territory”: down 10 percent from recent high. What's worse?

Jason Zweig:Well, I think there's a couple things that are even worse than that, David. One is that everybody cites market return without accounting for dividends. So you know the S&P 500 we've been hearing down for the year. You're correct about that, absolutely. But if you count dividends it's actually up slightly still. Now that doesn't mean it can't go down, that doesn't mean it can't go down a lot but it would be great if all of us did a better job of keeping these returns in perspective. I think that's the first point I would make is that it would be great if we all cited market returns including the income that most investors do get from their stocks. The second is if you think about the Dow Jones Industrial Average for example, putting that in historical perspective, we're all quite alarmed about the 500 point drops that have become commonplace this fall on the Dow. But a 500 point decline was 23 percent of total U.S. stock market value back on Oct. 19, 1987 when that happened and the Dow fell 500 points. Today, it's a 2 percent decline. So some of the volatility is more a matter of perception than reality. The market still is not that much more volatile than it has been historically and by some measures, it’s less.

Brancaccio: Here's what's on the mind of a lot of people during a turbulent moment: “Do I buy into a falling stock market or do I sell because it's going to fall further?” I think that's the the key thing that people wrestle with, for better or for worse. I don't know. I was looking at one of your books here, "The Devil's Financial Dictionary." There is an entry under “rebalancing,” maybe that's a better way to go here.

Zweig: Yeah, I think that's a very good guide for people's decision making. You know instead of trying to time some sort of entry point where you commit a large amount of money based on your intuition, it would be better if you just looked at your long-term targets. You know, how much money am I prepared to put at risk in the stock market? Let's say that you know 60 percent of your total assets, just throw a number out there. If these declines have you down to 58 percent or 57 percent, you can add a little. For that matter, if these declines are making you very, very nervous and during the crash of 2008, 2009, you took money out of stocks at that point because of your fears of a further decline then maybe you have too much money in stocks now and you should consider reallocating. But most people I think should not try to say “Oh, stocks are cheaper now than they were a couple of weeks ago, I'm going to buy some more” because no one has any idea. The stock market could go down 20 percent from here, it could go down 50 percent. Or, as it has done since the spring of 2009, it could triple or quadruple catching everybody by surprise.

Brancaccio: There's some Bank of America Merrill Lynch data showing that regular folks, mom and pop, you and me are buying into these recent dips but that big institutional investors tend to be selling. Is there a lesson to be drawn from that?

Zweig: The only lesson that we can ever draw from data like that is that there's no such thing as smart money, there's no such thing as dumb money, there's only just money. You know big institutions have more assets than small investors do. But historically there is no evidence that they're any better at timing when they buy or sell than regular Main Street investors are. And I would not take a strong signal from that in either direction.

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David Brancaccio is the host and senior editor of Marketplace Morning Report. Airing five times each morning, his reporting focuses on the future of the economy, financial and labor markets, technology, the environment and social enterprises.